Listen to the article
This document does not claim to be exhaustive, rather it aims to give a few ideas that might help in finding solutions to Lebanon’s current crisis.
1 – Diagnosis: Lebanon’s GDP has fallen from 55 billion dollars to around 20 billion. Whole economic sectors have been damaged. State debt has been reduced by over 50 billion dollars due to inflation. Lebanon has become a cash economy.
2 – An understanding of the crisis: While the economy has undoubtedly suffered from state mismanagement, high levels of corruption, geopolitical uncertainty, legal inefficiencies and insufficient competition, the present crisis is more the result of a liquidity issue.
The fact that banks’ clients are unable to access their savings, and that they are forced to resort to cash for almost all their transactions, has reduced money velocity and usable money supply. This alone would (applying the Fisher equation) explain 60% of the drop in GDP.
3 – Putting first things first: Restoring the GDP is the priority. The capacities allowing to arrive to a 55-billion-dollar GDP are being depleted. The country is emptying itself from the best and brightest. The 35 billion dollars missing from the GDP are at the expense of education, medical urgencies and general well-being, and those 35 billion per year are lost forever.
4 – Stopping the hemorrhage: Injecting liquidity into the market is an absolute necessity. With a GDP of 20 billion, a mere additional four billion would be enough to restart the economy. Those four billion are presently available at the Central Bank (which has twice as much). Releasing four billion from the obligatory reserves to the banks for them to lend, without changing anything to the regulations, would serve the purpose.
Clearly, those four billion would be more useful deployed in Lebanon than in banks in Europe or the United States. By comparison, releasing four billion dollars piecemeal through the different programs of the Central Bank would be counterproductive to say the least. They are creating mistrust and sterile work while not allowing clients to cater to their own needs.
What would the effect of such an injection be? A simulation would give the concrete answer, but the effect would certainly be large. The credit multiplier would be amplified by weak capacity utilization. Acting in their interest, banks would be eager to lend at more than 12%, which would generate 480 million dollars in revenues for them rather than just transferring money to some depositors. The four-billion additional GDP would generate new revenues for the state of over 600 million dollars. All this will engage the economy in a virtuous circle.
5 – Paying the public debts: Reneging on debts is not the right way to reestablish trust, rule of law and in any case an environment that induces growth. The state should find a way not only to pay its debts but also repair the damage it caused and generate the necessary resources to invest in infrastructure. Its debt should also be liquid in order for its holders to make use of it.
Regardless of the windfall that might come from oil and gas, instruments based on future revenues can be issued:
– GDP-based bonds
– Tax-based bonds
– Public utilities-based bonds
– Government entities-based bonds
On the other hand, it would be unwise to sell public assets in the present situation because they would fetch a distressed price, whilst selling some of the gold reserves would make a lot of sense. After all, those reserves had been accumulated for difficult days.
6 – Building for the future: Lebanon should aim for a GDP of 100 billion dollars and should not try to come back to a fraction of the previous 55 billion. Fixing the ills of the public sector, making the legal and fiscal environment the best in the region, piggybacking to renew infrastructure and helping the private sector concentrate on the most appropriate sectors for our country would allow Lebanon to reach that goal, whatever oil and gas can generate.
Lebanon should also make all efforts to be a beacon for Lebanese-origin persons abroad. In practical terms, it has to become more diaspora-friendly and more humane towards Lebanese in Lebanon.
(*) Riad Obegi is Chairman and General Manager of BEMO bank.
